Monday, October 8, 2007


A while back, I performed a little exercise where I found this table and then distributed the cost of each class of medical procedure across some combination of three categories. Using this methodology, I found that:

About 35% of all expenditures go for routine care.
About 55% go for catastrophic care.
About 10% go for end-of-life care.

(If anybody has better numbers than this, I'd love to see them. I suspect that my methodology was more than a little flawed.)

Prices for catastrophic care are going to be largely inelastic. Market dynamics aren't going to do anything for people who are scared of dying. And I have no idea what you do about end-of-life care. In any event, it seems that these categories are what insurance is for. If you mandate that the insurance industry uses uniform or "universal" risk pools, rather than trying to cherry-pick healthy subscribers into low-cost, low-premium groups, it's pretty easy to come up with a reasonable premium to spread the risk across all Americans and provide something like universal coverage. Then you can subsidize low-income subscribers through any number of different mechanisms: tax credits, vouchers, government-provided insurance, etc.

Which then leaves you with the 35% of the pie that's routine expenditures. Today, you've got HMOs and insurance PPOs that act as the bargaining mechanism to hold prices down. This probably isn't giving you a very good deal, since insurance-based negotiators are only interested in holding prices down enough that their premiums are competitive. Beyond that, they just pass the prices on to their subscribers.

I suspect that you'd get better deals being done if you came up with a set of "HMO-lite" organizations, where you were offered a flat-rate deal on a very specific set of routine CPTs (CPTs are those nasty little codes that show up on your medical bills), with catastrophic insurance handling everything that wasn't covered. The HMO-lite would then handle developing a decent network of providers and applying collective bargaining for decent prices. Again, subsidizing the poor can be done using a variety of methods.

If you transform the bargaining model from an insurance-based paradigm to a more standard collective paradigm, you're going to get some market efficiencies that will drive down the cost of routine care. Furthermore, routine services are highly commoditized, which makes their prices extremely elastic. It'd be nice if you could wring out costs from more than 35% of the budget, but 4 or 5% of GDP ain't chicken-feed.

I like this solution because all the various pieces parts are relatively transparent. The insurance problem is an insurance problem, rather than some bizarre amalgam of risk-spreading, provider restrictions, and subscriber cherry-picking. The bargaining problem can remain market-driven and largely private. And we can have an honest debate about the size of the subsidies (i.e., taxation) needed to optimize the public health of the poor.

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